The New England Soap Company is considering adding some processing equipment to the plant to aid in the removal of impurities from some raw materials. By adding the processing equipment, the firm can purchase lower-grade raw material at reduced cost and upgrade it for use in its products. Four different pieces of processing equipment with 15-year lives are being considered: A B C D Initial investment $8,500 $18,500 26,500 $30,000 Annual saving in materials costs 3,500 6,000 7,400 9,000 Annual operating cost 2,100 3,000 3,200 4,100
The New England Soap Company is considering adding some processing equipment to the plant to aid in the removal of impurities from some raw materials. By adding the processing equipment, the firm can purchase lower-grade raw material at reduced cost and upgrade it for use in its products.
Four different pieces of processing equipment with 15-year lives are being considered:
|
A |
B |
C |
D |
|
|
Initial investment |
$8,500 |
$18,500 |
26,500 |
$30,000 |
|
Annual saving in materials costs |
3,500 |
6,000 |
7,400 |
9,000 |
|
Annual operating cost |
2,100 |
3,000 |
3,200 |
4,100 |
The company can obtain a 13% annual return on its investment in other projects and is willing to invest money on the processing equipment only as long as it can obtain 14% annual return on each increment of money invested. Which one, if any, of the alternatives should be selected? Use a challenger–defender
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